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Price of Solar Power Gets Astronomical

A polysilicon shortage may affect solar power growth.

Energy prices have been going through the roof lately, even before Katrina devastated the Gulf Coast. Oil prices are well more than $60 per barrel, natural gas prices have leaped to the $10 per million BTU range from less than $6 a year ago, and even uranium, used as fuel in nuclear power plants, is in short supply. With surging energy prices, interest in solar power is rising.

Unfortunately, solar power, which has always been a high-cost method of power generation relying on government subsidies for its growth, may be no closer to economic viability than it was several years ago. Here's why.

Most solar panels are made from a material called polysilicon -- and even though you may not know it, the world is addicted to the stuff. Polysilicon is used in many semiconductor devices. Intel(NASDAQ:INTC) and AMD(NYSE:AMD) use polysilicon in the manufacture of computer microprocessors, for example. Fortunately, the amount of polysilicon inside a microprocessor is very small, so the real driver of the shortage is increased solar panel production.

Solar panels are huge in size compared with electronic components, and they require large amounts of polysilicon. With high energy costs, producers are doing what comes naturally -- raising panel production. As a result, prices for polysilicon have surged from just $9 per kilogram in 2000 to at least $60 earlier this year.

Since Intel and AMD don't use much polysilicon to make a processor and their growth rates are relatively low, the shortage is unlikely to have a big effect on them -- unless it becomes very severe. The same cannot be said for solar panel makers, though. Since many solar panels use thick polysilicon (rather than a thin film of the stuff), the price of polysilicon represents about 80% of the cost of a solar panel.

So who, specifically, will be affected?

Those companies most affected will be those that want to quickly raise their panel production. In order to raise production, a company will have to find additional sources of supply, but that isn't easy in the current environment. CypressSemiconductor(NYSE:CY) subsidiary SunPower, which recently filed for an IPO, is one company in this position. SunPower is building new production lines and is planning to grow by 50% per year over the next three years. SunPower may have the technology to be very competitive in the solar power market because its panels have the two advantages of being both more efficient and better looking than competitors'. These advantages aren't so meaningful, though, if SunPower can't find the raw material needed to build its panels in the first place.

The polysilicon shortage is generating concern in the semiconductor industry, and polysilicon suppliers like Hemlock Semiconductor, partly owned by Dow Corning, are working to add capacity. Bringing substantial capacity online will take time, however. In the meantime, polysilicon prices will likely continue to be high.

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